German and French consumer moods

Chris Scicluna

Overview:
There were no major surprises from Fed Chair Jay Powell’s speech at the Council of Foreign Relations yesterday. Indeed, given the audience, he was bound to emphasise the “cross-currents” from events abroad, “heightened concerns over trade developments”, and “renewed concerns about the strength of the global economy”. But while they inevitably chimed with his comments after last week’s FOMC meeting, there was no unambiguous signal of easing as soon as next month. And St Louis Fed chief James Bullard , who voted for a 25bps rate cut last week, stated in a Bloomberg interview that a 50bps cut next month “would be overdone”.

So, USTs weakened slightly in Asian time today (10Y yields back above 2.00%). And, in the absence of significant domestic economic news from Japan and China, and this week’s bilateral between Trump and Xi expected to make no substantive breakthrough, most regional equity markets fell somewhat (despite a modest weakening of the yen the Topix closed down 0.6%, while China’s CSI300 was down 0.2%). JGBs also made losses (10Y yields up almost 2bps to -0.14%) even as the BoJ failed to reduce its purchase amounts at its latest Rinban operations. ACGBs also made losses at the short end of the curve, while Kiwi government bonds made modest losses across the curve, as the RBNZ predictably eschewed a rate cut at its latest policy meeting but signalled the likelihood of further easing in due course.

The negative moves in equities and bonds have followed through to Europe at the opening this morning, where the latest economic news was again mixed, with another positive sentiment survey from France and another weaker one from Germany. And in FX markets, Boris Johnson’s keenness to ratchet up the no-deal Brexit rhetoric has seen sterling weaken further, moving close to last week’s low ahead of Draghi’s easing remarks and thus approaching £0.90/€ for the first time since January.

Euro area:
After a focus on business sentiment at the start of the week – with the downbeat German ifo indices contrasting the relatively positive French INSEE survey – the euro area dataflow this morning centred on the household, with national consumer confidence surveys from Germany and France released.

In Germany, consumer confidence has trended steadily lower since hitting a series high early last year. And that negative run seems to be continuing, with GfK estimating a larger-than-expected decline of 0.3pt to a 27-month low of 9.8 in the headline index in the latest month. The detail, however, was not all bad. Admittedly, despite the strong labour market, the survey’s measure of income expectations dropped sharply in June, the lowest since March 2017. But the survey measure of broader economic expectations inched up slightly from the more than three-year low reached in May, still nevertheless remaining well down on its level this time last year. And having last month fallen back close to the bottom of the range of the past three years, the index of willingness to buy rose back slightly in line with the Q1 average, still however some way below the norms of the past couple of years but consistent with ongoing steady growth in private consumption close to the 1.6%Y/Y rate recorded in Q1.

In contrast, having reached a four-year low at the end of last year, consumer confidence in France maintained its improving trend, with the INSEE headline index up for a sixth successive month in June. And the rise of 2pts was larger than expected, taking it to a fourteen-month high of 101, above the long-run average. Within the detail, households’ assessment of their future personal situation fell somewhat, but that left it still at its long-run average. And while fears about unemployment were unchanged, their expectations for future living standards rose above the long-run average. Moreover, the share of households judging it to be a suitable time to make major purchases rose for the sixth successive month to remain above the long-run average and suggest a pickup in private consumption growth from 0.8%Y/Y in Q1.

In the bond market, meanwhile, Italy will sell inflation-linked bonds.

UK:
While Boris Johnson continues to try to divert attention from questions about his character by becoming increasingly shrill on Brexit, insisting that the UK must leave the EU on 31 October "deal or no deal", "come what may, do or die" – an approach that we would ultimately expect to be rejected by the House of Commons to prompt an early General Election – the economics news-flow should provide little in the way of diversion from the UK’s political car crash today. Certainly, data-wise it will be uneventful, with only UK Finance bank lending data for May due for release.

More interesting might be the testimony of BoE Governor Carney and certain other MPC colleagues to the House of Commons Treasury Committee on the May Inflation Report. The BoE’s statement issued following last week’s policy meeting acknowledged that GDP growth in Q2 is likely to be weaker than forecast in the May IR and that the downside risks to the economic outlook have increased, and we might expect further exploration of these issues today. Moreover, Carney’s recent comments correcting Boris Johnson for his misrepresentation of the scope for continued tariff-free with the EU in the event of a no-deal Brexit (i.e. the GATT Article XXIV issue) might also be discussed further.

US:
In the US, a busy day for economic data brings the advance goods trade and inventories figures for May, as well as durable goods orders data for the same month. In terms of the trade data, both exports and imports are likely to rebound from low-side readings in April. But imports seem likely to have greater upside potential, which should lead to a wider trade deficit. Meanwhile, after a flat April and declines in the previous two months, another subdued reading for durable goods ex-transportation seems highly likely given ongoing sluggishness of manufacturing output and heightened uncertainty about global trade and demand. Moreover, Boeing orders seem bound to add to the weakness.

Beyond the economic data, San Francisco Fed President Mary Daly will speak publicly after yesterday telling the NY Times that the economy faces "pretty significant headwinds" but recommended watching the data over the coming six weeks before deciding whether a rate cut is required. In the bond markets, the Treasury will sell 2Y FRNs and 5Y Notes.

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